State-sponsored patent entities threaten innovation

The popular mind connects the idea of patents with specific inventions: the telephone, the light bulb and the proverbial better mousetrap.

In reality, patent law is much more complex. The current information-driven economy has revealed shortcomings in the way patent law addresses innovations involving software and the information technology processes. To extend the mousetrap analogy, the way today’s technology patent process works it’s as if you can merely describe the process of baiting, trapping and killing the ordinary household rodent and gain the leverage to sue for patent infringement anyone who actually designs and builds any new mousetrap.

Legal shortcomings regarding software and IT processes have given rise to so-called patent assertion entities (PAEs), known pejoratively as patent trolls. PAEs are not motivated by protection of their IP investment in an extant product or service. Their business model is based on the reality that it is cheaper for defendants to settle an infringement claim than to endure a lengthy court process and the risk an unfavorable ruling. In 2008, American Intellectual Property Law Association put the median cost of defending a patent claim at $600,000—just in cases when less than $1 million was at risk. The median cost was $5 million in major patent cases. Elsewhere, the White House has cited research that shows PAEs filed nearly 60 percent of the patent lawsuits in the U.S. in 2012, up from 25 percent in 2007.

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Patent pools, whose original aim was to be a single point of licensing for groups of complementary patents involved in the manufacture of consumer electronic products, over the years have grown so much in size that they now present barriers to legitimate market entry.

For profit entities such as Italy’s pooling giant called Sisvel is a perfect example. Sisvel was originally founded in 1982 to maximize the value of a portfolio of television related patents.  Now it has grown into a patent holding super-power controlling the access to 12 different technology standards pools operating out of multiple offices in 7 countries. Sisvel made news when they requested that law enforcement raid the German CeBIT Trade Show claiming that 51 of its booths were infringing upon their patents. Though profiteers like Sisvel claiming infringement was nothing new; raids by armed guards drew international attention to just how far these pools were willing to go.

Now, foreign governments are getting into the game. South Korea, Taiwan, and Japan have formed government-sponsored patent trolls (GSPTs) that are bent on acquiring all the patents they can, in order to extract settlements from alleged infringers. For example, Intellectual Discovery, the Korean government controlled patent pool, has bought more than 200 U.S. patents, including one for retinal eye scan technology from Singaporean chipmaker Avago Technologies Ltd, according to U.S. government records.

Taiwan’s quasi-government agency, the Industrial Technology Research Institute (ITRI), holds more than 18,500 patents, and has not shied away from asserting them in U.S. courts. In July 2013, the Innovation Network Corporation of Japan partnered with Panasonic and Mitsui to form the “IP Bridge” patent pool with the aim acquiring 5,000 more patents.

That patent assertion entities like Sisvel are stifling innovation is bad enough without protectionist governments raising the ante. Only in today’s IP-fueled global economy, instead of slapping tariffs on imported products that compete with home-grown industry, governments are dubiously applying patent law to extract a “tax” on any product that threatens native commercial interests. Yet like old-fashioned import tariffs, such behavior only incites retaliation. As a result, consumers worldwide suffer as questionable infringement claims create a morass of litigation and inflated patent costs.

The U.S. thus far has resisted the urge to join the trend. Instead, both the White House and Congress are examining various ways of limiting the ability of patent pools from controlling too many substitute patents. Bipartisan efforts that allow the free-market to determine patent value should be encouraged and the U.S. should apply diplomatic pressure against the proliferation of GSPTs.   

The public is served when it gets a better mousetrap and when the inventors and innovators are duly compensated. Flaws in the current patent system are hindering these desired outcomes and enriching non-participants instead. Sound reform will end perverse incentives that have made patents legal bludgeons and restore them as a source of rightful royalties for innovators and inventors.

Titch is a telecom and technology policy analyst whose work had been published by the Reason Foundation and the Heartland Institute.